A recent NSW Court of Appeal decision brings new meaning to the term ‘buyer beware’ and is a warning to carefully monitor statements that a target makes to its employees during a merger.

Following a claim by two employees, the Royal Bank of Scotland (RBS) was required to make good on a guarantee by ABN AMRO Holdings Australia Ltd (AAAH) to its employees that all existing redundancy plans would extend for a period of 2 years after RBS acquired AAAH.

In making this guarantee AAAH was seen as acting merely as a conduit for RBS and was not making any representation on its own behalf.

To leave or not to leave – AAAH Redundancy Policy

McKeith and James were two senior employees of AAAH. AAAH was part of a banking group that was the subject of various competing takeover bids. Ultimately RBS was successful in acquiring a majority of the capital of AAAH.

AAAH had a redundancy policy that provided, among other benefits, a severance payment based on the number of years of service of the employee. During the bidding process, AAAH publicly stated on numerous occasions that RBS would continue the redundancy policy for at least two years after the merger. These representations were made by AAAH in communication packs to staff, publications to employees, press releases, and in a presentation at a general meeting.

The merger between AAAH and RBS was completed in October 2007. In late 2008 both McKeith and James were made redundant. No payments under the redundancy policy were made to either of them. They brought an action against both RBS and AAAH for unpaid benefits under the redundancy policy. They argued that even though AAAH made the representations about the continuation of the redundancy policy, it did so as a conduit of RBS and accordingly RBS should honour the redundancy policy.

Binding or mere statement of intention?

At first instance the employees’ claim was rejected. Justice McDougall concluded that the representations made by AAAH were nothing more than a statement of intention. He considered that a contract directly between RBS and AAAH employees would be a unilateral contract, with RBS offering to apply the policy to every employee who accepted by providing consideration in the form of continuing their employment. Justice McDougall thought it was ‘inherently implausible’ that each employee would be entering into an individual contract with RBS if they chose to continue to work for AAAH. He also considered it relevant that the representations were not made by RBS and it would be unusual for a contractual offer not to come from the offeror.

The Court of Appeal unanimously allowed the appeal and reversed Justice McDougall’s decision on this point.

The Court found that:

  • RBS was aware of the representations made about the redundancy policy and did nothing to withdraw them;
  • in making representations about the redundancy policy AAAH acted merely as a conduit for RBS;
  • the language used in the representations (‘commitment’ and ‘guarantee’) showed that RBS intended to be bound;
  • by remaining in employment with AAAH the employees were providing consideration for the promise that RBS would apply the redundancy policy; and
  • there was nothing ‘inherently implausible’ about an individual contract being formed with each employee, as the policy would only apply to the employees to be made redundant.

Implications

So, as a buyer you should think carefully about what you want to say to employees and how you intend to be bound after the merger completes. Are you comfortable with the target communicating ongoing policies on your behalf? Don’t assume that the promises made by the target will bind the target only – you may have to foot the bill if an employee makes a claim (as RBS had to do in this case). You should take steps to correct any communication by the target that doesn’t reflect your intentions post-merger. Take an active role in communicating with the employees, and avoid the risk of the target putting words into your mouth.